Monsoon Woes:

Nature is unpredictable. Either you get excess rainfall or deficit rainfall. Rarely it is just right. 2019 has been once such case where in we got excess rainfall:

Winter is coming...

Yesterday was FNO closing day.

After huge fall in index over last 10 days, shot covering was a logical outcome, which could have helped market recover.

But Nothing happened.

Market bleeded till the end.

Looks like lots of longs got unwound and many shots got rolles over.

 

What does that mean for investors?

1) Market would continue to fall and may take longer than expected to recover. It could take as long as 10 months.

2) Though many of us expect market to recover the in the speed in which it had fallen, it would take longer to recover due to lack of positive triggers and a series of event risks like Iran Oil Imbargo, state and central election results.

3) While many investors are shocked and worried about these market developments, it is not that bad. Except a dozen stocks which have fallen by 20% to 60%, many stocks have fallen by less than 10% in past one month. 

In mutual funds, Midcaps have fallen by 7%, Multicaps by 5%, Large caps by 4% and balanced fund by 3%.

Now comes the Question - What to do now?

1) It's never too late. Investors in a stock market can book profit where damage is 

less. Not necessary they have to dive in and do it today. But Can take stock and do it in next week or so and use this cash reserves to invest later.

Investors in mutual funds are in relatively safe zone. Their fund managers would realign the portfolio for better prospects. 

2) In both categories, do allocate fresh funds. We knew markets would be volatile. We have seen it in the past. And we have seen them recover too. 

3) Do invest in those stocks and mutual funds when they have meaningfull fall.

4) Invest gradually. Don't dump at one shot.

Stay in touch. We would be happy to assist you as and when required. 

Happy Investing

Sensex from 100 to 32000 and beyond...

• Sensex was created at 100 on 1979. 
• In 2017, Sensex hit 32000. 
• That's simply 320 times growth. 
• Sensex has grown by 16.87% on an average over the past 37 years.

As per the Rule of 72, 72 divided by 16.87 would give around 4.26 years - the approximate time taken to double your money, and 4.45 years to be exact.

Hence 100 became 200 in 4.45 years. 200 became 400 in another 4.45 years and so on.

As a result, 100-200-400-800-1600-3200-6400-12800-25600 : doubling in 8 terms of 4.45 years. That's 35.6 years. But now 37 years have gone by (1979-2017). If we add the balance for 1.40 years, the sensex value comes to 33536 - close to its current levels of 32000.

Hence Investors needs not worry about bubble in the market. The growth rate has been in line with its historic levels since 1979.

If we continue at the same growth rate, by 2019, you need not be surprised if the sensex reaches 51000!

And by 2023... OMG. Let me stop it there.

Hopefully we will be witness to this magic of compounding.

Equity Investing needs Patience - Not Intelligence:

Whenever I present this slide in Investors Meeting, that too line by line - the excitement would mount up. Rs.10000 invested in 1980 in WIPRO is worth Rs.541.44 Crores!. And this is apart from all the dividends received over these years. (Last years dividend alone is Rs.2.86 Crores!!). 

Often this slide leads to a question by some investors who say "I have been investing since 1980, but have never made even a fraction of the money".

My answer to them has two parts : 1) Ability to identify stocks like Wipro 2) And staying invested all along.

Identifying stock like WIPRO is a tough task. But even more tougher is staying invested till now. Even those who invested in Wipro in 1980 have not made such huge money - The reason being - they sold too early, in the name of profit booking, over valuation, contentment and what not. The result is obvious : Investment returns is more than Investors Returns. The resultant gap / loss between these two is due to Behaviour Gap.

(Source: The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richard.)

Equity Investing is an art. Those who know to cut the noise in the street are the ones who make money. But vast majority of investors get distracted, lose focus and get lost - like the current situation:

Sensex hit its historic high of 32686 (on 1st Aug 2017) and Nifty hit 10178. After a huge run up, many investors are getting uncomfrotable at these high levels. They feel these high levels are unsustainable and market has to fall. Infact, many of those investors who missed out investing earlier are praying that market should crash - so that they would get another opportunity to invest.

But the reality is - the Indian retail investors through Mutual funds - primarily SIP's, have been pumping money, month after month into the market. Atlast they have discovered to invest for the long term. This is now acting as a huge counter balance to FII's selling pressure. Most likely when FII's return after few months, markets may remain where they sold and their buying pressure could lift the market further.

More over Indian Stock Markets are bound to do well over the long term for following reasons:

1. The GDP growth rate in past 30 to 40 years on a 3 to 5 years average has been 12% to 16% . This is nothing but the sum of GDP + Inflation (6%+8%). This growth has been irrespective of governments, monsoon, global crisis etc.
2. The main reason for this secular growth rate has been the Population growth itself. India is a huge consuming economy. Hence we are least dependent on exports. We can consume whatever we produce. This is not the case with many countries who have capacity to produce but not consume. Hence India becomes a big market for these countries and they have no other option but to deal with India and do business.
3. Demography (age of the population) has been the buzz word for past few years. Indian populations average age has been 26-27. This is the age at which these young people get employed, earn money, spend money on basic needs and lifestyle, get married etc. Hence there is bound to be a constant churn in the system - Cash will be flowing across the channel.
4. Reducing Family size : The indian culture has been a joint family culture. But in the recent hurry burry world, many of these families are breaking up and lots of small individual families are getting created. Invariably all these families need home to live, basic amenities like fan,light,washing machine, microwaves, fridge, TV etc. For instance, if a family breaks up into four families, then all these amenities get quadrupled - fueling the economy.

.

In todays world, every indian family has got a mobile phone, 60% families have TV, 10% have a Car and 4% have an Air conditioner. This broadly gives an idea on the scope of growth.

.

All these factors don't change overnight. Hence there is little sense in worrying that market is at 32000 point. There may be stagnation / fall in short term. But the long term growth story is intact. You can no way avoid this growth. Investors simply need to learn the art of cutting the noise and listening to the music.They need to stay focused on their investments and keep investing incrementally to avoid regretting like the way many are doing with the WIPRO case! 

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At the end Equity Investing Needs Patience - not Intelligence!!!
.

Are Markets Overvalued ? ... Article published in MINT

In Over Valued Markets, stick to basics of Investing:

The essence of value investing is to invest when valuations are cheap and in favour. It is a fairly straight forward to buy cheap and hold for long years as valuations gradually trend up. But what must investors do when markets become expensive? An investor must know how to exercise discipline during both over-valued and under-valued phases. While 'buy and hold' is the only proven way to creating long-term wealth, investment choices matter. This is true especially when too much money chases performance in bull markets and performing stocks are in scarcity.

The current state of our equity market brings back memories of the years 2000 and 2008, where the bull run suddenly took a tailspin.

In both the years, like it appears now, there was widespread consensus among investors on valuations. Herd mentality among investors led to scarcity in stocks. This drove up valuations swiftly, further fuelling herd mentality. This virtuous cycle finally went bust.

Back in 2000, investors were liberal in valuing companies belonging to select themes like information technology (IT). We had a situation where the IT blue chips traded at 3-digit price-to-earning (PE). Investors wanted to own 'tech' and chased the price upward. This created a scarcity of shares. People sold blue chips in other sectors like Hindustan Unilever Ltd, Britannia Industries Ltd and GSK Consumer Healthcare Ltd to buy stocks such as Satyam Computer Services Ltd. The scarcity drove up tech stock valuations and in 2000, the blue chip tech stocks traded at multiples of up to four times those of other sectors.

The year 2008 saw a repeat of 2000. This time, the excesses happened in infra and power. Companies with limited track record took on business risks way beyond their capabilities. They borrowed huge sums of money. The accounting wasn't great and the market valuation went too high. Companies needed huge sums of capital to execute their projects and needed to raise equity. Most companies ended up borrowing and then missing out on raising equity. Companies could not execute their big plans and ran up losses. Investors ended up losing 90% of their money in mid-sized infra companies.

The post-election euphoria of 2014 was principally led by large-caps. Investments from foreign institutional investors (FIIs) were in exchange-traded funds (ETFs) and domestic mutual funds (MFs)-mostly large-cap funds. The index hit a new high in 2015 only to reach the lows of February 2016. Market expectations ran ahead of the economic recovery, resulting in sell-offs by savvy FIIs.

But the same can't be said of the entire market. After the election results of 2014, mid-caps were favoured as they benefited from falling commodity prices during the 2014-16 period. Investors started to sell large-caps and focus on mid-caps. High net-worth individuals were already deeply entrenched in mid-caps. When MFs raised big money in this category during 2015, mid-cap valuations began to climb swiftly. By end of 2015, mid-caps had outperformed large-caps. Valuations raced ahead of earnings. A situation arose where large-cap valuations were much lower than the mid-cap valuations.

In 2016, the economic recovery remains slow, with talks of green shoots doing the rounds for quite a while. Large and the well-known names in industry are struggling to grow earnings at 15-20% per annum. Except a handful, most large companies have not been able to meet estimate forecasts. And, there is hardly any immediate scope for sustained earnings upgrades in the near to medium term, in front rung large-cap stocks.

Yet, investor appetite for equity is at full throttle with the belief that economic recovery is round the corner. Retail investors are chasing stocks and equity MFs' assets under management are swelling. In this scenario of ordinary returns, capital is desperately chasing ideas. Fund managers and portfolio managers are under compulsion to deploy money. Given their compulsion, investors prefer to invest only in stocks with strong earnings visibility. The small- and mid-caps have captured the lion's share of MF inflows, further fuelling a boom in them. Naturally, investors continue to hold on to overvalued stocks. They are unwilling to sell them.

Their logic is that the scarcity won't go away anytime soon. This has made the herd mentality worse. Everybody either owns the same set of stocks or is buying them. These stocks are already consolidated in strong hands. As more people chase them, their valuations will rise further. Today, several mid-cap stocks are selling at PE multiples twice that of the Nifty. Scarcity, clearly, is to blame for the prevailing investor biases and this will definitely hurt long-term wealth creation. But, in every previous market cycle, nobody could predict the end of the scarcity. All we know is that when the herd mentality was at its peak, scarcity ended quickly. Why? Because scarcity is merely an outcome of consensus. And consensus is a fickle thing. When the consensus is shaken, the scarcity will vanish.

Scarcity in one category or theme has never sustained beyond 1 or 2 years. Yet, the herd mentality has made investors repeatedly pour capital into one sector over short periods of time. Only a few rare investors know the cost of being the part of a herd. The consensus in the market is scary and absolute. Finding contrarians is rare. The scene is set for a swift and sudden reset of valuations. The only way to keep our investing safe and sane is to adhere to the principles of value.

Value investing ensures disciplined, long-term wealth creation. While showing conviction to hold on to equity for very long years, an investor must also ensure that her investment book is structurally sound and aligned to valuations. When markets get overheated, an investors must reallocate capital from overvalued parts to undervalued parts. It is important to note that pharma and FMCG stocks traded at the decade's lows in 2008, even as power and infra stocks traded at high valuations. Now, large-caps are more attractively valued than micro-caps, small-caps and mid-caps. A long-term investor must ensure that she allocates money sensibly. The conservative way is to re-balance investments. This will ensure that the buy-and-hold strategy works in the long term. Importantly, it is time to actively apply value-investing principles to ensure that the investment choices are right and our conviction delivers.

Author: Shyam Sekhar is the chief ideator, ithought, Chennai

Indian Stock Markets - Are they Overvalued ? ... as on 8th August 2016

Indian stock market seems to be on the roll. Fuelled by series of positve news : Good Monsoon + Low Inflation + Likely fall in interest rate + Low commodity prices like crude and metals + passage of crucial bills (reforms) like GST, markets seems to have taken cue and is running up in one direction.

But there are few concerns to it: 

• The impact of good monsoon takes couple of quarters to play out.
• The 52 Week (One Year) high of BSE sensex is 28418 and today it is 28180. We are very close to the one year high levels.
• And the All time high of sensex is 30025.
• Meawhile, the Mid and small cap index have run up way long. Midcap index hit a new high of 12276 in July 2016 and Small cap index is very close to its all time high of 12,204.
• The Sensex PE is 20.2 Vs long term average of 18.
• Midcap inces PE is commanding a premium over sensex at 25.9!
• And the small cap PE is at 42.8!!!
• The Price to book of Sensex is 2.9, whereas for Midcap it is 2.6 and small cap is @ 2.

Inspite of weak global markets, Indian Index is at peak along withglobal markets like S&P and Dow Jones. That makes the bull run bit worrisome.

Unless the earnings upgrade happens, holding on to the current valuations could be at risk. For those investors who practice the simple investors philosophy of Buy Low and Sell high - this is not the market.

Better to book a partial profit and remain in sidelines till such times clarity emerges.

Post Crash on 24th Aug 2015:

·         BSE Sensex fell 1625 points (5.9%) on 24^th August 2015.

·         Indiex has not fallen more than 5% in a single day since 2009.

·         This is Sensex BIGGEST ever fall in absolute terms and 27^th largest fall in percentage terms.

·         Going by past trend, every big fall is followed by a bounce back within next 3 months.

·         How do we compare the market fall in 2008 (Sub Prime) and in 2015 (Chinese Scare)

o   In 2008 the fall was drastic and painful

o   In 2008 the sensex ran up from 14000 point to 21000 points : 50% run up between Jan 2007 to Jan 2008.

o   The fall in 2015 has been gradual. Just before crash, sensex was 28000 points and now it is 25000 points.

o   In 2008 Sensex was trading at 25 FPE, but in 2015 it is at 15.3 times. Sensex long term average is 14.5 times PE.

o   In 2008 sensex fell from 21000 points to 7700 points in just 9 months.

·         Given relative low valuation, the sensex could fall to a maximum of 22500 levels (another 10% downside).

·         Lots of positives in 2015:

o   RBI has a forex reserve of US$ 350 Billion : Could use upto US$ 20 billion to defend rupee if required.

o   Falling Oil Price.

o   Falling Import bils.

o   Falling Fiscal deficits.

o   Removal of Petrol / Diesel subsidy.

o   Ability to reallocate funds for public welfare like : Universal Insurance and Banking.

o   Thrust on Infrastructure.

o   Transparent auction of Natural resources like spectrum and Coal.

o   Direct transfer of Benefits in Public Distribution and LPG

o   Indian exports @ 15% of its produce Vs 30% for Chinese.

o   Investing now could be rewarding over the next 18M to 24M

o   For market to bounce back strongly, we need ‘series’ of good news – which is unlikely – China is like to keep bothering along with Europe etc.

o   In the BRIC (Brasil, Russia, India and China) nations, all except India are facing challenges.

o   Russia is commodity driven (oil). Hence lower crude is likely to create serious problem.

o   Brasil – again a net commodity exporter has been downgraded to JUNK status recently

o   And Chinese problem is widely read now.

o   Apart from Brasil, Russia and China all other countries like Japan, Middle east, Taiwan, Korea, Malaysia are all having hand full of problems.

o   Hence India with above mentioned positives is likely to attract lots of investments from  FII’s.

·     

   Given the positives, few concerns about India are:

o   Monsoon woes – Right now we have received 12% below monsoon. But it is not in our hands. So no meaning worrying about it. It is out of control.

o   Reforms at Slow phase. With failure of Govt to pass on key legislations like Land bill and GST in Rajya Sabha – many feel it could be a dampner. But this is very much in control and the people in power know to how to get things done. So, let’s not worry about it.

o   RBI’s reluctance to cut interest rates. The RBI governor will be concerned about the monetary policy than the stock market policy. And no one can guess what is in his mind. So, let’s leave it to him.

o   FII inflow in 2015, till August has been Rs.33,000 Cr Vs Rs.97,736 crore in CY2014. But CY2014 was an election year. Hence lots of funds flew in anticipation of a historic verdict. With limited options to invest world wide, India will remain one of the few choices for FII’s to invest.

o    Hike in US FED Rate : It is imminent. The only question is whether to hike it now or later. And it is more like having the first dip in cold water. Once the first hike is done, people will get used to it. Not to be denied that the rate hike could result in funds moving out of India. But, as mentioned in previous point, India remains one of the obvious choice for investments for next couple of years atleast.

·         Outlook:

o   Next few months could be very volatile. Hence Hang on to your investments and keep investing in smaller lots.

o   Next 12M to 18M could be rewarding for Investors. Since the excess (From 30000 points to 25000) has been shaved off, markets are currently attractive. Even if market bounces back to 30000 points, you would make 20% returns. That’s Cool.

o   Investment Strategy:

§  Choose sectors that benefits from fall in Rupee: Like Pharma and IT.

§  Invest in Domestic Consumption story companies, since fall in commodity prices like Oil could increase purchaseing power

§  Invest in Consumer facing businesses like FMCG, Paints, Consumer Durables and Automobiles.

§  Avoid commodity sector like metals, oil etc.

§  Manufacturing sectors may not be rosy since cheap imports and challenging exports could affect them.

§  Avoid PSU Bank’s – due to elevated Non Performing assets.

§  Be cautious in Private sector banks – since 2 new banks : Bandhan and IDFC along with dozens of Payment banks to challenge existing pvt sector banks on retail loans etc. Private sector banks may underperform in next 6M to 9M.

The BEST RETURNS are made only when investments are made during TOUGH TIMES.

Monsoon Update : July 2014

After a late start, Monsoon is catching up to some extent. Thank God !

Investor Behaviour Cycle

I was reading through below mentioned article and thought of sharing with the readers of this blog. The content of the article is very relevant in todays market situation. To read the original article, click here.

Beware of the Investor Behaviour Cycle

India’s GDP growth has been hitting new lows primarily due to collapse in the investment cycle. Investment gurus and TV pundits are urging investors to increase allocation to equities suggesting that the investment cycle is close to bottoming out and is all set for a strong rebound. However there is another cycle namely the ‘Investor behaviour cycle’ which tends to have an even greater impact on the end returns an investor eventually makes. 

A typical investor behaviour cycle starts with optimism driven by a change in the environment. Investors allocate some savings to equity hoping to make positive returns. As more and more investors start investing in equity their return expectations are realised as the market continues to move higher. With return expectations met, recency bias kicks in (extrapolating most recent events into the future, in this case positive returns). Investors not only reinvest their original savings and returns but in fact increase allocation by putting in more savings (in some cases using leverage). This phase coincides with euphoria as the market starts hitting new highs. One sees a host of equity issuances as promoters lap up the opportunity to raise cheap equity. Risk is thrown out the window and the rising tide of liquidity lifts all boats, money making becomes extremely easy. All investors start believing they are investment geniuses, as any stock they invest in, is up 25% in a week with a lot more upside to go. All this continues till an event in the environment forces people to start looking at risk again. As investors book profit share prices tumble and as more and more people start selling, the cycle in reverse this time, reinforces itself.

Here is a graphical representation of investor behaviour ... as it is :

In India’s case a weak multi party coalition being replaced by a strong single party majority was a reason to be optimist. We have seen a sustained rally in equities since August 2013, firstly driven by anticipation of a change in government and then in hope of potential structural reforms initiated by the new government. The early optimism seems to have now reached a stage of euphoria as a host of penny stocks hit circuit filters every day. New issuances which had dried up over the last three years suddenly have resurfaced primarily via the QIP market (a lot of them by companies tethering near bankruptcy which have been thrown a lifeline). The IPO market will start buzzing sooner rather than later. Downside risk is a term not heard often. 

How long this euphoria lasts is anyone’s guess. But we do know that expectations in the market are running high with risk averseness running low. Investors would be well advised to ignore all this noise and focus on fundamentals alone. A stock specific approach focusing on company’s long term earnings potential evaluated against its risk is well advised (which is the process followed by Quantum Long Term Equity Fund*). Everything else is best ignored. 

Also, when it comes to your investments, your redemption should depend on your financial goals. A mere guess should not hamper your investments and your potential to earn better returns. As an investor you should also consult your financial advisor before taking an important investment decisions.

Monsoon starts poorly:

Monsoon has kicked off poorly with scanty rain. Below shown chart is quiet illustrative. Pray monsoon revives - otherwise inflation will stay high - spoiling all the hopes of the new government and its revival plan.

Though the start of the monsoons doesn’t appear to be healthy however water reservoir levels remain significantly higher (~153%) than their 10-year average level, which should provide a buffer in case of a weaker monsoon season, as per the latest report from the Ministry of Agriculture. Also, month of July and August will be crucial to understand the actual level of monsoon received.

Note: 1) rainfall figures are based on operation data.

2) Small figures indicate actual rainfall (in mm), while bold figures indicate normal rainfall (in mm).

Percentage departures from normal rainfall are shown in brackets.

Also note: 

Election impact on stock market:

With India going through the final phase of polling and results expected in next 9 days (on 16th May 2014), just like political parties, lots of investors are eagerly waiting for the results. Though it is common sense that if the expected happens, markets could rally and viceversa. But analysis of past 5 elections reveal, though markets react to election results as they are announced, but markets revert and continue their trend soon after.

That brings us to the question, how many of us are going to participate on the election day. The fact is many of us are silent spectators. It is more like a moving car - it zips past you. Though we have the joy of remaining active on election day - cheering up, justifying, debating etc - they don't add up to your investment results.

Hence investors who genuinely want to profit out of investments should deploy their investments at every available opportunity. For the past 20 days Indian stock market has been in a narrow range, with frequent bout of profit booking. Use this opportunity to pick your  favourite stock and 'Profit out of Panic'.

Below mentioned slide was sent to me by TATA Mutual Fund, as part of a market presentation.

Is 'India Story' cracking?

Why Buffett Bailed on India

By Willie Pesek Jul 23, 2013 2:32 AM GMT+0530, Bloomberg

India has long been viewed as a value investor’s dream: rapid growth, 1.2 billion people pining for a taste of globalization, and underdeveloped industries ripe for turnarounds. So it surprised few when the genre’s guru, Warren Buffett, placed a bet on the world’s ninth-biggest economy.

What did come as a surprise, though, was last week’s decision by the billionaire’s Berkshire Hathaway Inc. to give up on India’s insurance market after just two years. Adding to the drama, the withdrawal came the same week India unveiled plans to open the economy as never before to foreign-direct investment.

Buffett isn’t alone in voting with his feet. Wal-Mart Stores Inc., ArcelorMittal (MT) SA and Posco are pulling back on investments in India that they had announced with great fanfare. What’s scaring foreigners away? 

A rampant political dysfunction that has stopped India’s progress cold.

Headwinds from New Delhi are contributing to the slowest growth rates in a decade, a record current-account deficit and a 7.9 percent plunge in the rupee this year. Fiscal neglect has bond traders demanding higher yields for government debt than India wants to pay. But the most devastating no-confidence vote is coming from the big, long-term money India needs to boost its competitiveness. Foreign-direct investment slid about 21 percent last fiscal year, and this one doesn’t look promising.

Biggest Democracy

In theory, no Western executive or investor can ignore the vast potential of Indian consumers, 29 percent of whom are under age 15. India’s geopolitical importance is rising in step with China’s ambitions. U.S. Vice President Joe Biden, visiting New Delhi this week, is hoping to deepen Washington’s bond with a possible bulwark against Beijing’s influence, as well as increase bilateral trade.

The problem is an Indian government that won’t get out of its own way. The long debate over foreign-investment limits says it all. In September 2012, Prime Minister Manmohan Singh’s government passed a law allowing big retailers to open stores directly in India, yet no one has. Reasons are legion: too many prerequisites; constraints on whom goods can be purchased from; a raft of regulations limiting franchise models and factory construction; and the hair-pulling need to negotiate separately with each of India’s 28 states.

India has fallen into a self-destructive pattern of relenting on the big issues, then killing would-be investors with the details. Take the experience of furniture retailer Ikea of Sweden AB, which in January won approval to open outlets in India. Not content with the Swedish icon investing about $2 billion, the government played hardball. It tried to bar Ikea from selling food in its stores; Ikea stood its ground. But the damage was done.

Executives fully expect to have to navigate India’s notoriously bad infrastructure, rigid and often unskilled labor markets, red tape and official corruption. They’re less keen on tripping over the fine print of vaguely written laws and local power brokers with agendas at odds with New Delhi. Headline-making disputes involving household names like Ikea, Wal-Mart and Berkshire don’t help India’s image.

Worse, the uncertainty is breeding a huge trust deficit. On July 17, India moved to open important sectors such as defense, power and telecommunications to foreign investment. It’s being heralded as the nation’s “big bang.” Big fizzle is more like it, as big inflows are likely to continue eluding India.

Any major foreign investor cannot ignore the experience of Vodafone Group Plc, which is still wondering if it will take a multibillion-dollar loss on a deal thanks to tax-policy changes. In 2007, the Newbury, England-based carrier acquired the Indian unit of Hong Kong-based Hutchison Whampoa Ltd. Since then, a retroactive clause placed in the nation’s laws have thrown the deal into chaos, creating a $2.2 billion tax dispute, delaying an initial public offering and further denting India’s reputation.

Squandered Potential

It’s time for the government to stop squandering India’s potential. The lack of transparency and reliability makes it virtually impossible to consider long-term investments there. And even if a foreign executive has faith in the sober-minded Singh, there’s no guarantee his ruling Congress party will be in power after elections next May. The opposition Bharatiya Janata Party, normally a pro-business crowd, has threatened to roll back India’s new investment laws.

What should India do? Pass clear and strong investment laws that will survive the change of government and offer a code of conduct for state leaders. India must strengthen the rule of law as it applies to foreigners so they’ll trust their money is safe. Finally, India must think long-term. Today’s motivation for inviting more foreign money is to narrow the current-account deficit. The goal should be to raise competitiveness, gain fresh knowledge and create better-paying jobs for the future.

Along with politics, India often lets scale get in its way. There’s a sense in New Delhi that India’s sheer size, vast supply of cheap labor and clear potential should have China looking over its shoulder -- that companies should rush there regardless of the political tangle.

Yet India is proving that size doesn’t guarantee its inevitable rise. Only true economic reform, political openness and more proactive leadership will do that -- and get the Buffetts of the world to come to India and stay.

(William Pesek is a Bloomberg View columnist.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net.

All About "Inflation Indexed Bonds" :

Pursuant to the announcement made in the Union Budget for 2013-14 to introduce instruments that will protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buy gold, RBI, in consultation with Government of India, has decided to launch Inflation Indexed Bonds (IIBs).

In the light of above, the RBI would

 Ø Issue Inflation Indexed Bonds (IIBs) in two series during FY 13-14 for an amount aggregating to Rs. 12,000 Crores – Rs. 15,000 Crores

Ø The First series of IIBs would be issued in first half of the current financial year with first tranche to hit the market on June 04^th ’13 with Rs. 1,000 Crores – Rs. 2,000 Crores

Ø Each tranche of IIBs will be for Rs. 1,000 Crores – Rs. 2,000 Crores in 2013-14 and the same would be issued regularly through auctions on the last Tuesday of each subsequent month during 2013-14

Details of First Series Inflation Indexed Bonds (IIBs):

Ø IIBs will be having a fixed real coupon rate and a nominal principal value that is adjusted against inflation. Periodic coupon payments are paid on adjusted principal

Ø The adjusted principal would be arrived at by multiplying the applicable indexation ratio

Ø The indexation ratio will be computed by dividing reference WPI index for the settlement date by reference WPI index for issue date of the IIB

Ø Here the reference WPI would be the Final WPI with four months lag. For example, Sept 2012 and Oct 2012 final WPI will be used as reference WPI for 1st Feb 2013 and 1st March 2013, respectively. The reference WPI for dates between 1st Feb and 1st March 2013 will be computed through interpolation.

Ø At maturity, the adjusted principal or the face value, whichever is higher, will be paid

Issuance Method:

These bonds will be issued by auction method

Retail Participation:

Non-competitive portion will be increased from extant 5 per cent to up to 20 per cent of the notified amount in order to encourage participation of retail and other eligible investors

Maturity:

Issuance would target various points of the maturity curve in order to have benchmarks. To begin with, these bonds will be issued for tenor of 10 years.

Second series of IIBs exclusively for retail investors will be issued in second half of the financial year. First series of the IIBs will help in determining the coupon rate for the bonds through auction. This will help in benchmarking IIBs.

Source: RBI Press Release, Dt: May 15^th ‘2013

Positive Recovery : Across the Globe

Liquidity Driven Rally

Behavior of price movement is similar - be it vegetable market or stock market. If there are more buyers than sellers (demand is more), then price rises. And if there are more sellers (be it lesser demand or panic), price falls. Correlating it to stock market - stock price movement in the short run is more a function of this demand rather than fundamental valuation. But in the long run, it is the valuation that wins and short term demand gets 'corrected'.

Table below clearly would illustrate this fact.

In India, after opening up the economy - FII's participation in the stock market is crucial. They bring in lots of money which dictate the trend.Whenever they have invested huge money, market has gone up. And whenever they have sold (withdrawn) their investment, markets have crashed. And usually they withdraw when fundamentals detoriate. After all they are hardcore investors - looking for profitable investment avenues.

• When stock prices go up rapidly, then PE of the stock rises (Price to Earnings). And stock prices go up when more investors are interested in buying the stock.
• Similarly, when people sell shares or donot buy the shares - it means demand has come down - stock prices fall. This is precisely the biggest risk of liquidity driven market. For a market to fall - investors neednot effectively sell - if they donot invest - then the demand comes down and market falls. This is very clear from the above table. Between Dec 2010 to Dec 2011, FII's didnot invest money and pulled out small portion: US$ 512 Million - and market fell by whooping 25%.

Hence if global liquidity dries up, our market may be no exception. Unless the fundamentals improves like fall in inflation, fall in fiscal deficit, fall in fuel price etc, there is little scope of sustaining at higher levels. Ideally investors can clean their portfolio of unwanted stocks and keep cash ready for investing at opportune time.

Ailing Economy To Dampen India's 66th Independence Celebrations

As India gets ready to celebrate its 66th Independence Day August 15, it appears to be no time to rejoice with its economy faltering as a result of the global economic slowdown and weak governance.

The economy deteriorated sharply to 5.3 percent in the January-March quarter, down from 9.2 percent in the same period last year. The political backdrop is that the ruling Congress is far from committed to market-oriented reforms.

Mr. Duvvuri Subbarao, Governor of the Reserve Bank of India, made it clear in a speech at an event in Thiruvananthapuram Monday that the focus should be more on containing inflation than on targeting high growth. The RBI argues that lower interest rates would do little to boost growth. Indeed, it concludes that further reduction of the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.

Last month, in its policy statement, the bank cut its growth forecast for this financial year (April-March) from 7.3 percent to 6.5 percent. The RBI's explanation for this cut is that industrial production in April and May was weaker than it had expected and the slowdown in the euro zone, the U.S. and other emerging economies had intensified.

Economists feel that even this rate is too optimistic. "Our forecast is for GDP to rise by 6 percent this year and just 5.5% in 2013. This is partly because we anticipate a further deterioration in external conditions, particularly in the euro-zone. Also, while the RBI suggests there has been a pick-up in activity in India recently, we are not convinced," Andrew Kenningham, an economist at Capital Economics, said.

This year's disappointing monsoon may still have a significant negative impact on the output, inflation and budget. The lack of rainfall will add to concerns about inflation and sharp economic slowdown which has been under way since late last year. Agricultural output continues to be more important for India than for most other emerging economies.

The drought could also have an effect on inflation. The government should be able to contain the impact of the drought on rice and wheat prices because of its price support system and stockpiles of grain which could be released if needed.

The low rainfall will add to pressure on the budget. There may well be demands for increased expenditure on fertilizer and perhaps an expansion of the rural job creation scheme or write-offs of farmers' debts.

Looking ahead, the RBI's more hawkish tone suggests that there is a growing possibility that the central bank will leave rates unchanged this year. However, considering the present economic situation, it has to be seen how long the concerns about the flagging growth will outweigh worries about inflation. 

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Is "Investing = Equity Investing" ?

There is a huge difference in the investment duration during a bull market and a bear market. Investors who have invested during the recent bull market (2003 to 2007) have been spoilt. They expect a repeat of 2003-2008 now. But the period since 2008 had been a complete contrast in emerging markets. Emotionally, invesors tend to conect with the former much more than the later, though the later may be more important. And many investors think that equity is the only way to beat the street and keep ignoring other asset classes like Gold, Bonds etc. Many investors "Equate Investing with Equity Investing."

Investors need to step back from this kind of madness and take more measured approach. Ideally they need to invest in multiple assets. SENSIBLE INVESTING :

• Does not require ultra fast decision making.
• Requires patience, reflection, intelligent reading.
• Willingness to look at all asset classes with an open mind at times, proper asset allocation.
• Understanding of importance of staying on the side line and
• A determination to pay no heed to 'frenetic activity' of media views on investing.

Ideal time frame for equity investing is till such time market recovers back to deliver positive returns. Remember "Markets can remain wrong, longer than you can sustain". Hence invest that part your investment, which would not worry you, in equity-so that you could wait for markets to recover and deliver positive returns.

Murky Waters - by Mr.Sathish Ramanathan

Mr.Sathish Ramanathan is Head-Equities, Sundaram Mutual Fund. He opines that the Indian Equity Markets is Murky. Hence the chance of quick revival is a distant dream. Experts of his views are:

• No One wants to take "Hard Decisions".
• Policy makers wish to look into "Soft Options".
• Combination of factors : Slow Project Approval, Weak Global Environment, High Inflation and Poor sentiment took toll on India's GDP Growth. It dropped to 5.3% in March 2012 Quarter, which is lowest in nine years.
• Despite correction in Global commodity price, depreciating rupee has put inflation pressure.

What resulted in Rupee Depreciation & Trade Deficit:

• It all started with high oil price. With India being Oil Hungry Nation (importing 78% of our oil needs), government regulated (rather-dictated) fuel price though was precived as populistic - backfired badly. India was selling Oil at price lower than its import price.This resulted in mounting fiscal deficit, along with few other factors like Coal import and Gold import mentioned below. As a result of mounting deficit, Indian currency started to fall against almost all currencies. 
• For instance, Power Plant came up faster than coal capacities could expand, resulting in record import of coal,
• Our diesel consumption is high due to high subsidies in diesel and shortage of power.
• Consumption has led to rupee depreciation : Looks confusing : Higher government spending on higher salaries and lower taxes have impacted in higher consumption. It was so unfortunate that majority of these consumption have been of imported items, resulting in rupee depreciation and hiking trade deficit.

On Consumption:

• Rising agri output and increased support price have further fuelled consumption.
• Real estae price, Higher Gold price and Increased income indicates that the new found richness have been channalized into consumption sectors like Cars, Mobiles and Homes.
• Record trade deficit indicates that India's consumption NEEDS to slow down on some sectors like consumption and simultaneously increase capital expenditure to debottleneck and create capacities.

On Infrastructure:

• Bank's have loaned One-Fifth of their loan book to infrastructure projects, which are typically of long gestation. Delay in these projects execution are likely to delay repayment and hence impact bank's profits.

On China's Slowdown:

• Global weakness was known and it was widely expected that China's exports would suffer.
• But domesting slowdown was not expected.
• A debt surge of US$ 1.7 Trillion for local government and $ 380billion investment in railways have resulted in strong capital expenditure demant to unprecendented levels.
• China is also experiencing the pains of rapid credit growth as India.

On Euro Zone:

• Post Lehman Crisis the epicentre of financial trouble has shifted to Euro Zone.
• Once talked to be an alternative currency to US Dollar, Euro is now being rattled.
• 5 countries among the 17 country which form part of the Euro Zone are in trouble.
• They are PIIGS : Portugal, Italy, Ireland, Greece and Spain.
• So far only Greece and Spain have surfaced.
• The total debt of Greece is US$ 236 Billion, Spain is US$ 1.16 Trillion, Portugal is US$ 286 Billion, Ireland is US$ 867 Billion and Itally is US$ 1.4 Trillion.
• Clearly the problem in Euro zone is bound to continue.
• And there has been concrens raised by countries like Finland which are not happy to pay for other nations debt and mismanagement. They have voiced their preference to break away from Euro Zone and Euro Currency if needed.
• In case of curency breakup, Germany will stand to lose the most, since its currency will appreciate pushing German Companies into recession.
• And also there is a liquidity crisis among European Banks with people pulling out money from Spanish and Greek Banks and putting into stronger German Banks. This trend is continuing and straining the banking system.

To sum up:

• It is hard to be cheerful these days.
• Dramatic Global Slowdown could actually help reduce the inflationary pressure.
• A dramatic fall in commodity price could ease the trade deficit and fiscal deficit.
• Since India is facing election by 2014, there is unlikely to be a thrust towards growth.
• Corporate earning have been marginally negative.
• Lact of corporate initiative to increase capacities due to weak gobal sentiments and domestic clearance issues implies that domestic capacities will not increase, even if required.
• The inevitable slowdowna nd grind downwards would be the long term outcome.
• On Invesment side, money continues to move away from equities.
• Within equties, money is moving from high leaverage companies to free cash flow companies.
• Investors needs to keep in mind : Quick rebound may not take place. They need to understand, appreciate and implement the merits of investing gradually .
• As corporate India reduces debt, improves efficiency and builds for next leg of growth, Investors should be ready to participate in these growth stories.

Global Rate Cuts : Are we facing another crisis ?

On 5-July-2012, In a span of 45 minutes, the European Central Bank and People's Bank of China cut their benchmark borrowing costs and the Bank of England raised the size of its asset-purchase programme. Their actions came two weeks after the US Federal Reserve expanded a programme lengthening the maturity of bonds it holds. US Fed Chairman has indicated that more measures will be taken if needed.

A Rate cut in these economies would lead to cheaper funds - fuelling up price of commodities and assets. No doubt commodity prices have crashed by 20% to 30% be it Gold or oil or iron ore. Though we are not sure why these economies are so agressive in rate cuts, we asume it is primarily to pull up the demand.

But the problem for India is : rising commodity price will keep the inflation higher preventing any possible rate cuts by RBI. No doubt it is going to be TIGHT ROPE WALK

Faster growth with bigger deficit & higher inflation : India's new growth paradigm

By: TT Ram Mohan
Professor, IIM-Ahmedabad
Article Published in Economic Times.


In 2011-12, a broad consensus on India's growth prospects broke down. The Economic Survey expects growth to accelerate to 7.6% in 2012-13 and 8.6% in 2013-14. Many analysts and investors are sceptical. Which is right? The official view or that of the sceptics?

To begin with, we need to understand what has caused the sharp deceleration in growth in 2011-12 in the first place. Several businessmen and commentators insist that it is internal factors, mainly 'policy paralysis', that have dealt a blow to growth prospects. It is more plausible, however, that the deterioration in the external environment caused by the eurozone crisis is primarily responsible. The survey subscribes to this view.

In 2004-08, the Indian economy grew at 9% on the back of a global boom. Growth slumped to 6.7% in 2008-09 due to the global bust. In 2011-12, the world seemed to be on the brink of a crisis similar to what we had in 2008. One should not be surprised India's growth should of the same order as in 2008. The survey points out that in all the G20 countries except Australia, there was a monotonic decline in growth over successive quarters. India cannot be an exception.

It follows that any improvement in the global environment should translate into a higher growth rate for the Indian economy in 2012-13. There are indeed signs of such an improvement. The IMF chief, Christian Lagarde, said recently that the "world economy has stepped back from the brink and we have cause to be more optimistic".

The sceptics disagree. They argue that even if the global environment becomes more benign, inadequate fiscal consolidation is a fundamental obstacle to India getting back to a high-growth trajectory. This proposition deserves close scrutiny.

It is clear that fiscal consolidation will happen more slowly than thought earlier. The Budget's Medium-Term Fiscal Policy Framework envisages a fiscal deficit-to-GDP ratio of 3.9% by 2014-15. The Thirteenth Finance Commission (TFC) had wanted the ratio to come down to 3%, the target set by the FRBM Act.

A high fiscal deficit is bad for several reasons. One, it creates problems of debt sustainability. This is not an issue for us today. The TFC's target for the Centre's debt-to- GDP ratio of 45% by 2014-15 is expected to be met in 2012-13 itself. Secondly, high fiscal deficits can fuel inflation that dampens investor sentiment. Since fiscal consolidation will not happen as planned earlier, we should expect inflation to remain above the Reserve Bank of India's (RBI) comfort zone of 5%.

It needs to be grasped that a high rate of inflation per se is not a problem. It is variability in the rate of inflation that is the problem as economic agents are then faced with uncertainty. The worry when inflation rate touches double digits is that policymakers have lost control over it, so it can shoot up even further. However, if the RBI can demonstrate that it can contain inflation at 6-7%, growth need not be derailed.

The biggest concern about the slow pace of fiscal consolidation is that it will erode the savings rate and, hence, the rate of investment. High investment rates have been a crucial factor in India's growth rate rising to 9% in 2004-08.

Here is a striking fact: in the period following 2008, the investment rate has averaged 35% despite declines in the savings rate. This is because a wider savings-investment gap has been bridged by foreign flows and shows up as a higher current account deficit. Whereas the current account deficit was 0.4-1.3% of GDP in 2005-08, it rose to 2.8% in 2009-10 and 2010-11.

Now, there is broad agreement that a CAD of 2.5-3% of GDP is manageable for India. Taking the lower end of the range, it would mean that the economy can tolerate a CAD that is 1.2-2.1% higher than in 2005-08. A decline in the domestic savings rate of this order, caused by a higher fiscal deficit, can be made good through foreign inflows.

Adding 1.2-2.1% to the average fiscal deficit of 3.4% in 2005-08, we arrive at a tolerable fiscal deficit level of 4.6-5.5% of GDP. At this level of deficit, the domestic savings rate plus foreign flows can support an investment rate of 35%, which is good enough to deliver growth of around 8-9%. This computation is somewhat conservative. The domestic savings rate, while eroded by the fiscal deficit, could rise on other accounts,such as greater financialinclusion, a decline in the inflation rate and a rise incorporate savings as the growth rate rises.

In short, the slow pace of fiscal consolidation, which appears inevitable, need not come in the way of an acceleration in the growth rate. What it will do is defer India's getting back to the 9% growth path by two to three years.


Since India's integration with the world economy has grown, many wonder whether a high investment rate by itself can deliver a high growth rate when global growth will be sluggish.

Yes it can, because slow growth in the advanced economies is not a big threat as the EU and the North America now account for less than a third of India's exports. It is the disruption of financial flows caused by afull-blown crisis that poses a threat, not slow global growth. If there is such a crisis, all bets are off.

This may sound wildly optimistic but it is possible that India is moving towards a new growth paradigm. The fiscal deficit will remain at a higher level on the average than in 2004-08. Inflation will be above the comfort zone of 4-5%. We will not have a global boom along the lines we saw earlier. And yet, growth of the order of 8-9% will be achievable thanks to a high investment rate.